Analyst: Pressure from NPLs to mount

China's banking sector faces greater pressure in terms of asset quality this year and will confront more difficulties in resolving nonperforming loans, according to the China Banking Association.

In a new report, the group warns that the economy, being in a critical stage in its transformation, will take time to stabilize, while the acceleration of local government debt swaps and the reform of state-owned enterprises will lead to growth in NPLs.

Lian Ping, chief economist with Bank of Communications Co Ltd, who led the study on which the report is based, says credit asset quality will deteriorate in several sectors, including coal, photovoltaic, iron and steel, cement and shipbuilding.

The economic slowdown in regions such as the northeast will also expose the areas to greater credit risks, he says.

"Certain companies and industries are exposed to default risks this year," he explains. "With the deepening of interest rate and exchange rate liberalization, liquidity risk management has become increasingly challenging."

The report advises banks to promote the construction of a comprehensive risk management system as well as continue to explore measures for quantitative risk management, to effectively identify, calculate, monitor and control potential risks. Banks are also urged to give more support to the application of new technologies such as big data, to optimize risk management models.

As of March 31, Chinese commercial lenders' nonperforming loans reached 1.39 trillion yuan ($207 billion; 187 billion euros), up 9.2 percent from the end of last year. The NPL ratio increased 8 basis points to 1.75 percent during the same period, the China Banking Regulatory Commission says.

jiangxueqing@chinadaily.com.cn

(China Daily European Weekly 07/15/2016 page29)